April 17, 2008

TALLINN - The Estonian central bank more than halved its 2008 economic growth forecast to 2.0 percent on Wednesday, citing fears of a global slowdown and national factors, notably high inflation.

The move by the bank, which had been forecasting gross domestic product (GDP) growth of 4.4 percent this year, followed a downgrade by the finance ministry.

The ministry two weeks ago slashed its forecast by nearly a third from 5.2 percent to 3.7 percent, on similar grounds.

Both cuts are the latest sign of rising jitters in the Baltic state, which has enjoyed years of robust economic growth since independence from the crumbling Soviet bloc in 1991.

Last year, the country's GDP grew 7.1 percent, after a national record of 11.2 percent in 2006 which was also the second-best rate in the entire EU.

"The Estonian economy is cooling faster than expected," the central bank said in a statement on Wednesday.

"This has been caused by a less supportive external environment, which has brought slower external demand growth and a rise in commodity and food prices, as well as an increase in risk margins," it said.

"In addition, the increasing uncertainty and high inflation have reduced domestic demand."

A growth rate of either 2.0 percent or 3.7 percent would mark Estonia's worst economic performance since 1999, when output shrank by 0.1 percent, according to figures from the central bank.

That year, Estonia was hit by the shock wave from financial crises in neighbouring Russia, a key trading partner, and in Asia.

The finance ministry has predicted growth should rebound in 2009 to 6.0 percent.

The central bank, however, was gloomier, saying Wednesday that growth would increase in 2009 but at 3.0 percent it would be much lower than its previous estimate of 5.7 percent.

Growth in 2010 was likely to pick up to 5.0 percent, it said.

The central bank said annual inflation -- which reached 6.6 percent in 2007 -- could hit 9.8 percent this year.

However, it should fall to 4.5 percent in 2009 and 3.0 percent in 2010.

EU countries not already in the eurozone, as is the case for Estonia, are bound under the Maastricht Treaty criteria to reduce inflation to close to the lowest rates in the EU's 27 member states as part of their convergence programmes for adopting the single currency.

The upper ceiling for average inflation is around 2.0 percent.

Estonia's failure to keep inflation on target upset its drive to join the eurozone at the start of 2007.

Although no new date has been set for making the switch from the national currency, the kroon, Estonian officials have suggested it may be possible by 2011.

The central bank said it expected inflation to be "close to the Maastricht inflation criterion at the end of 2010."